Existing Home Sales On Tap

Yesterday the greenback continued on its bearish path against most of the majors and it slipped to another new record low versus the EUR. The fears that the subprime crisis will spill over into the broader economy and actually begin to slowdown growth rekindled expectations that the Fed will further slash its 4.75 % key benchmark rate. An additional rate cut by the Fed could have a significant negative impact on the greenback as it will reduce the dollars appeal against the high yielding currencies and therefore it will lower the level of foreign investment coming into the US. In the last few weeks the greenback weakened the most against the EUR and this is mainly due to the widening growth differential and the shrinking interest rate differential between the US and the European economy. The current market expectation is that will we see another rate cut by the Fed in the near future and this is putting the dollar under major pressure. However a weak dollar combined with rising oil prices will push up inflation and this could restrict the Fed’s decision with regards to future monetary policy.

There were significant news releases from the US yesterday and Fed Chairman Bernanke remained discrete during his speech before the Chamber of Commerce Summit. Looking ahead to today the most significant news to be released from the US will be Existing Home Sales and Consumer Confidence. Both these figures are expected to release weaker than last month and with the sustained problems in the housing sector it is very likely that these figures may spring a downward surprise. If this is the case then we could see some volatility that will push the dollar downward. The main reason for this is because the weak data will raise the markets expectation of another rate cut by the Fed which will put pressure on the greenback.